SMSFs and Soap Operas
Here we go again. A warring step-family, a marriage breakdown, father loses capacity, an Enduring Attorney, challenges to a Will, and an SMSF gone wrong. Sounds like a soap opera or, at least, the plot for a new reality TV show.
Well, sadly for the Davies family and many other Australian families, it is very real and very destructive.
Peter and Estelle Davies were in their second marriage and each had adult children from previous relationships. The gyrations in their affairs are best summarized as follows:
1. In 2005, Peter and Estelle set up the Davies Self-Managed Superannuation Fund ("SMSF"). They were both the Trustees and Members.
2. In early 2012, Peter and Estelle separated, and Estelle applied to the Family Court for final settlement of their property interests.
3. Later in 2012, Peter lost capacity to make decisions due to dementia, and his son Tony, was appointed to a variety of positions:
• On 15 June 2013 as Peter’s Enduring Power of Attorney;
• On 16 September 2013, as Peter’s Case Guardian in the Family Court proceedings; and
• On 19 November 2013, as Peter’s Guardian and Financial Manager under orders made in a Guardianship Tribunal.
4. In March 2014, the Family Court, amongst other things:
• required Tony to be appointed as a Trustee of the SMSF in Peter’s place;
• to do certain things which would culminate in the distribution of the SMSF assets, and
• Estelle ceasing to be a member and Trustee of the SMSF.
5. Peter died on 24 November 2015.
6. In his last Will dated 18 October 2012, Peter appointed Estelle’s son-in-law George Holland as his executor (“the Executor”). In the Will, he left everything to Estelle. Tony then commenced a challenge to the Will.
7. Peter did not have a binding death benefit nomination in place for his SMSF and, as is usual, the SMSF Deed provided that the Trustees of the SMSF would have discretion about who to pay Peter’s death benefit to.
8. Estelle and George signed a Deed of Confirmation which purported to ratify George’s appointment as a Trustee of the SMSF from Peter’s death, thereby replacing Tony.
9. It went to Court with Tony disputing (among other things) his removal as Trustee, and seeking a declaration from the Court that he remain a Trustee of the SMSF.
10.Tony claimed he was appointed in his personal capacity not as Peter’s Enduring Attorney. Estelle and George argued that Tony’s appointment ended on Peter’s death because the Enduring Power of Attorney ceased to operate, and that George should be appointed to ensure there are 2 members of the SMSF.
Are you still with me?
What’s it all about…. really?
Apart from being complicated and contorted, the dispute revolved around who was to receive the $1.4M (approximate) death benefit payable from the SMSF following Peter’s death.
1. Peter made no binding death benefit nomination; and, as a consequence
2. The Trustees of the SMSF decide who gets the death benefit.
So, Estelle and Tony are jockeying for control of the Trust as Trustees because it's the Trustees who, in this case at least, decide how Peter’s death benefit is dealt with.
And the Court said….
Not surprisingly, the Court observed that Tony had been wearing a number of legal ‘hats’ at various times in relation to Peter’s affairs.
Specifically, in respect to the SMSF, the court had to decide which hat he was wearing when he was appointed to the position of trustee when Peter lost his capacity. As the court said:
"What impact did Peter Davies’ death, and the consequent termination of the enduring power of attorney have on the plaintiff’s status as trustee of the Fund, and has the second defendant been validly appointed as a trustee of the Fund in lieu of the plaintiff?"
The Court found that Tony’s appointment was valid and continued after Peter’s death but that George’s appointment was invalid as Tony did not consent to the appointment.
It reasoned that Tony was appointed in his personal capacity and not as an Enduring Attorney. In reaching the decision, the Court concluded that,
“When a legal personal representative, such as a person holding a power of attorney, is appointed a trustee of a SMSF, they act in their personal capacity as trustee pursuant to their appointment as trustee rather than as an attorney or agent for the member”.
So, where an Enduring Attorney is appointed as a replacement Trustee for an incapacitated trustee of an SMSF, and the trustee then dies, unless the SMSF Deed provided for the Enduring Attorney’s appointment as Trustee to cease at that time, the Enduring Attorney will remain a Trustee to deal with the payout of death benefits.
If there is no valid binding death benefit nomination, the Trustees can exercise discretion (within the parameters of the law) about the payment of death benefits to any person who qualifies as a “dependent” under the relevant law, including, possibly, themselves.
Doing things differently…
What a saga and the upshot of the complicated webs we can weave in our lives. So what can be done to avoid these issues?
• Review Estate planning documents regularly and after significant life events such as separation or divorce.
• Check and understand who will control the SMSF on death or incapacity. Reviewing the Deed and considering the interaction with other documents such as an Enduring Power of Attorney or Will is critical.
• Ensuring valid death benefit nominations (binding when appropriate) are in place. Too often nominations are invalid because there was a failure to follow the SMSF Deed when making nominations or are simply never made.
• Ensuring that the SMSF Deed is up to date. Generally, if the Deed is pre-2008, it should be updated to bring it into line with the many changes that have occurred. Post-2008 Deeds may need an update depending on their content.
Rebecca Edwards, CRH Law